Image Source: Unsplash

Over the long term, both the S&P 500^® Quality Index and S&P 500 Momentum Index have outperformed the broader market (as measured by the S&P 500) in terms of absolute and risk-adjusted returns. The quality factor emphasizes financially strong and stable companies, while momentum tracks stocks with sustained price trends. When combined, these strategies create a complementary pairing that can enhance diversification across various market environments. In this blog, we will explore their methodologies, key characteristics and performance.

(Click on image to enlarge)

Methodology Overview

High quality is typically associated with a company’s strong profitability, high earnings quality and robust financial strength. To reflect these quality characteristics, the S&P Quality Indices¹ utilize three key metrics: return on equity (ROE) to assess profitability, balance sheet accruals ratio (BSA)² to evaluate earnings quality and financial leverage ratio (FLR) to measure debt-to-equity level (see Exhibit 2).

Momentum indices focus on securities that have recently demonstrated strong relative performance, positioning for their continued outperformance. The S&P Momentum Indices generally use 12-month risk-adjusted price momentum to select stocks ranked in the top quintile.³ To account for short-term reversal effects, the most recent month is skipped when calculating price momentum.⁴ The use of risk-adjusted momentum, instead of raw price momentum, may help to mitigate the negative effects of idiosyncratic risk associated with raw momentum and reduce downside risks.⁵

(Click on image to enlarge)

Quality and Momentum: Mutual Diversifiers

These factors can be complementary as they highlight distinct yet synergistic drivers of performance. Momentum focuses on market dynamics and investor sentiment, whereas quality is rooted in intrinsic financial strength. By combining these two factors, the resulting blend could strike a balance between performance potential and downside protection. Momentum tends to enhance performance in strong, trending markets, while quality offers stability during downturns.

These characteristics are evident in their performances across various economic regimes⁶ (see Exhibit 3). The S&P 500 Quality Index has historically outperformed in Falling Growth regimes, while the S&P 500 Momentum Index has historically performed better in Rising Growth regimes. With a historically low excess return correlation of -0.07,⁷ the S&P 500 Quality Index and the S&P 500 Momentum Index tend to act as effective diversifiers for each other.

(Click on image to enlarge)

Combining Quality and Momentum: Potential for More Persistent Performance

To illustrate the historical advantages of combining the S&P 500 Quality Index and the S&P 500 Momentum Index, we have created a hypothetical index of indices with equal weights of 50% assigned to each (referred to as the “50/50” index). This index is rebalanced semiannually at the end of June and December. As shown in Exhibit 4, the 50/50 has a few striking features.

More Persistent Historical Returns

The 50/50 index consistently outperformed the broader S&P 500 on a more consistent basis, in both absolute and risk-adjusted terms across various short- and long-term horizons.

More Favorable Capture Ratios

Furthermore, the 50/50 index has exhibited more favorable capture ratios, achieving one-to-one returns during up markets⁸ while experiencing significantly smaller declines during down markets.

Outperformance across Historical Economic Regimes

Finally, the 50/50 index generated positive excess return across all economic regimes, while the S&P 500 Quality Index experienced negative excess returns in Rising Growth environments and the S&P 500 Momentum Index had negative excess return in the Falling Growth and Rising Inflation economic regime.

(Click on image to enlarge)

¹ Please refer to the S&P Quality Indices Methodology for more details.

² Richardson, Scott A., et al., “Accrual Reliability, Earnings Persistence and Stock Prices,” Journal of Accounting & Economics, Vol. 39, No. 3, September 2005.

³ Please refer to the S&P Momentum Indices Methodology for more details.

⁴ Jegadeesh, Narasimhan and Sheridan Titman, “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency,” The Journal of Finance, Vol. 48, No. 1, March 1993.

⁵ Fan, Minyou, et al., “Momentum and the Cross-section of Stock Volatility,” Journal of Economic Dynamics and Control, Volume 144, November 2022.

⁶ Hao, W. and Rupert Watts, “A Historical Perspective on Factor Index Performance across Macroeconomic Cycles”, S&P Dow Jones Indices, November 2024.

⁷ Correlation is calculated using monthly excess returns of the S&P 500 Quality Index and the S&P 500 Momentum Index versus the S&P 500, respectively, from Dec. 31, 1994, to Aug. 31, 2025.

⁸ The market is defined as the monthly performance of the underlying benchmarks from Dec. 31, 1994, to Aug. 31, 2025.

More By This Author: